SC calls out ILECOs’ ‘onerous contracts’

By Francis Allan L. Angelo

In a landmark decision that could reshape the power landscape in Iloilo, the Supreme Court has called out the “take or pay” provisions of the power supply agreements (PSAs) of Iloilo Electric Cooperatives I, II, and III (ILECOs).

The ruling stemmed from a petition filed by the ILECOs seeking to prevent MORE Electric and Power Corporation (MORE Power), the power distributor in Iloilo City, from operating within their franchise areas in Iloilo province. The decision has far-reaching implications for the electric power industry in the Philippines.

MORE Power’s expansion is embodied in Republic Act 11918.

In a July 30, 2024 decision penned by Associate Justice Rodil V. Zalameda, the Supreme Court dismissed the petition and upheld the validity of RA 11918.

The ILECOs had argued that their PSAs with their suppliers were valid and binding and that MORE Power’s entry into their franchise areas would impair these contracts.

However, the Supreme Court disagreed, stating, “That they are still obligated to pay their minimum contracted capacities (by virtue of a take-or-pay provision), verily, does not support the conclusion that there is any change in the terms of the contracts.”

The Court further noted, “On the contrary, that petitioners are still bound by their alleged take-or-pay provisions, in fact, shows that their power supply contracts and electric service agreements have not been impaired and that they remain as valid and efficacious notwithstanding the passage of RA 11918.”

The High Court even chided the ILECOs for entering into “take or pay” contracts. These provisions obligated the ILECOs to pay for power whether it was consumed or not, which could pose financial difficulties if MORE Power operated in the same areas and reduced the ILECOs’ customer base.

The Supreme Court reminded the cooperatives that RA 9136 (Electric Power Industry Reform Act) mandates that distribution utilities like the ILECOs must “supply electricity to their captive market in the least cost manner.”

“The foregoing provision now begs the question as to why petitioners ILECO I, ILECO II, and ILECO III, in contracting their power requirements, entered into take-or-pay provisions, which are onerous to the interests of the consumers.”

To mitigate these challenges, the ILECOs will be forced to renegotiate their PSAs to exclude the take-or-pay provisions. This approach would allow the ILECOs to adjust their supply obligations based on actual demand and avoid financial strain.

The Energy Regulatory Commission (ERC) can also step in and exercise its powers under the EPIRA Law.

“If the issue of petitioners lies in the take-or-pay provisions, Rule 1, Section 7(d) of the Implementing Rules and Regulations of the EPIRA empowers the Energy Regulatory Commission (ERC), after due hearing, to stop and redress any unfair trade practice that harms the interests of the consumers,” the SC decision reads.

The decision has dealt a significant blow to the ILECOs, who have been locked in a legal battle with MORE Power over franchise areas in Iloilo province.

The ILECOs had contended that their franchises were exclusive and that MORE Power’s operation in those areas was illegal.

However, the Supreme Court dismissed this argument, stating that the ILECOs’ franchises were not exclusive and that MORE Power had the right to operate in those areas under its own franchise.

The Court clarified that the exclusive franchise granted to electric cooperatives under the law pertains only to the areas covered by their existing service lines.

The issuance of a franchise to a distribution utility does not automatically grant it an exclusive right to operate in the franchise area.

The power to issue franchises belongs to Congress, and the ERC has the authority to determine the terms and conditions of the franchise.

The ruling has been welcomed by MORE Power, which has been advocating for a competitive power market in Iloilo City.

The company has argued that competition will lead to lower electricity rates and better services for consumers.

With the Supreme Court’s decision, MORE Power is now free to operate in the ILECOs’ franchise areas, which could lead to increased competition and benefits for consumers.